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Global Outsourcing: The Road Ahead

Since the end of the U.S. presidential campaign, the issue of outsourcing has ceased to be daily fodder for television news outlets. But it remains an issue that many American corporations struggle with on a daily basis.

Aside from controversy surrounding the loss of American jobs, companies must decide what processes to outsource and which countries to choose as offshoring locations. They must also confront privacy and security concerns surrounding the sending of information to offshore locales.

Outsourcing Specialization

Ravi Aron, a professor of operations and information management at the Wharton School of Business at the University of Pennsylvania, estimates that between 2000 and 2004, the Indian outsourcing industry alone added 260,000 new jobs. Observing India’s development and similar growth in China and the Philippines, other regions of the world are doing what they can to encourage outsourcing on their soil as well.

Dubai, one of the United Arab Emirates, has begun development of a tax-free zone in which foreign-owned companies can do business-process outsourcing work, drawing upon Dubai’s population of English-speaking citizens.

Mauritius, an island nation in the Indian Ocean, wants to supplement tourism income with outsourcing, particularly in high-tech jobs. Its citizens boast fluency in French and English, attracting the attention of many North American companies.

Competitive moves by countries that have yet to make names for themselves in business process and IT outsourcing have convinced Giri Krishnan, equity analyst in the technology group at Morningstar Inc. in Chicago, that established outsourcing markets will begin to specialize in the tasks they manage for Western clients.

“I certainly see firms in countries like India and China beginning to specialize in newer forms of BPO services,” he told CRM Buyer. “For instance, debt collection services in the U.S. are being outsourced to India. Firms like Reuters in the U.K. have been outsourcing key aspects of journalistic work to India.”

Krishnan reported that investment banks use analysts in India to handle basic financial analysis and model-building, and health insurance firms have generated enough business in claims processing that employees in cities from Bangalore to Delhi have received additional training.

“India is doing more value-add, especially with HR and financial process outsourcing,” said Philip Fersht, director of software, outsourcing, and systems infrastructure and services at Yankee Group. “China is doing more back-office crisis outsourcing.”

Growing Economies

The 30 to 50 percent annual growth rates experienced by Indian BPOs in the past few years have had broad consequences, including significant improvements in the standard of living. “All one has to do is drive down the streets of any major city in India, and you find anecdotal evidence in billboards advertising vacation resorts, multi-storied luxury apartments and the coolest automobiles,” said Krishnan.

In most markets, however, it will be a long time before rising wages create a problem for U.S. companies looking for cost efficiency, said Dennis Jacobe, chief economist with Gallup International Inc. “You’re talking about a big difference in economies,” he said. China likely will reach saturation soonest, he predicted, but not soon enough to concern U.S. firms now.

On the other hand, wages have risen so quickly in India that it’s not much cheaper than Canada as an offshoring location. Canada, moreover, has other advantages. U.S. firms that send jobs north of the border benefit from highly educated workers, especially in Newfoundland and British Columbia. These Canadian workers have close familiarity with the U.S., enabling them to “handle all manner of calls, questions and cross-sales,” said the Yankee Group’s Fersht.

Fersht believes India represents a “shortish-term phenomenon” in outsourcing. In the long term, Fersht said, locations in North America and Europe will challenge BPOs in India.

Languages and Technical Skills

In recent years, U.S. marketers have shown interest in segmenting their customer bases, especially along ethnic lines. As outsourcing becomes more prevalent, it’s only natural that companies that serve a variety of consumer groups will look for bilingual workers.

“There is a growing interest in the U.S. in the Hispanic market, but I haven’t heard of extensive outsourcing” in Latin America, said Gallup’s Jacobe. A recent report from A.T. Kearney, however, noted that the Dominican Republic and Puerto Rico have ramped up their outsourcing capabilities to handle Spanish-language work from U.S. companies.

“Definitely Spanish-language [outsourcing work] will grow in consumer businesses and related industries — anything to do with customer service,” said Fersht. He pointed to the air travel industry in particular.

Other industries are less interested in language than in technical capabilities. Countries such as Russia and Brazil — with large populations of skilled workers who will work for relatively low wages — stand to make a killing in engineering-related outsourcing.

China does too. “Countries like China have always produced a lot of qualified engineers, many of whom have been migrating to the U.S. to occupy technology jobs in leading companies. So demand for IT education has always been healthy in China,” said Krishnan. “However, what you’re now seeing is that a lot of the Indian firms like Infosys and Satyam have established offices in China.”

Privacy Concerns

Too many companies are neglecting a potential problem looming on the horizon: “Privacy and greater sensitivity to consumer data being exchanged is not a big deal right now,” said Gallup’s Jacobe.

Despite media reports about concerns over the safety of data once it leaves the United States, U.S. corporations aren’t providing much information on their data policies. “There’s not a lot of incentive to provide much information,” Jacobe said. “The requirement or pressure for information will come from consumer groups and politicians.”

Once they hand off projects, Fersht said, most companies don’t want to worry about the security of their data abroad — that’s the point of outsourcing.

The outsourcing companies themselves have been most active on this question. “In response to potential consumer backlash over banks like Lloyds TSB outsourcing transaction processing to places like India, the local authorities are taking specific measures to quell these concerns,” said Krishnan. “Usually, it’s not the government that takes these steps [to protect consumer data] but industry lobbying groups.”

This story was originally published on Feb. 24, 2005, and is brought to you today as part of our Best of ECT News series.

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